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THE ROLE OF SEBI AS A SECURITIES MARKET REGULATOR

 

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Written By: Anwesha Ghosh

Introduction:

SEBI stands for Securities and Exchange Board of India which regulates the securities market in India.

With the expansion in the dealings of stock markets, a lot of malpractices also started in stock markets, for example, price manipulation, delay in delivery of shares, violation of rules and regulations of the stock exchange and listing requirements. Due to these malpractices, the investors started losing confidence in the stock exchanges. Therefore Government of India chose to set up an agency or regulatory body known as Securities Exchange Board of India (SEBI)[1].

SEBI was established majorly to reinforce the oversight of the securities market in India in the wake of a securities scam (Rs.5,000 crore Harshad Mehta securities scam which hit the Indian stock markets) that surfaced in 1992.[2]

Historical Background on the establishment of SEBI:

The idea of setting up a regulator was first proposed Shri. Rajiv Gandhi, the then Prime Minister of India, in his budget speech for the financial year 1987-1988 who proclaimed the government’s intention to set-up a different authority for the regulation and efficient working of the Indian Capital Market. By notification dated April 12, 1988, the Securities and Exchange Board of India (SEBI) was constituted as an administrative body to work under control of the ministry of Finance fundamentally to advance the orderly and healthy growth of the securities market and for investor protection.[3]

Prior to 1992, the Controller of Capital Issues (CCI) was the regulator in charge of the capital markets in India. It reviewed applications from companies which wanted to raise funds mostly via IPO. The biggest disadvantage of the CCI was that it was governed by bureaucrats since inception and these civil servants who had a limited understanding of how the stock markets should be run. They didn’t have the experience or expertise of businessmen, financiers or even economists. But like all other civil servants, they were underpaid which ultimately lead to corruption. The way they did things hampered the growth of capital markets and business in general and the Government of India wanted to correct these shortcomings and re-establish a new institution which would help India capital markets to grow substantially. With the SEBI Act coming into effect in 1992, CCI was repealed and abolished.

Purpose and Role of SEBI:

SEBI was set up with the main purpose of keeping a check on malpractices and protect the interest of investors. It was set up to meet the needs of three groups, namely:

  • Issuers: For issuers, it provides a market-place in which they can raise finance fairly and easily.
  • Investors: For investors, it provides protection and supply of accurate and correct information.
  • Intermediaries: For intermediaries it provides a competitive professional market.

Objectives of SEBI:

The Preamble of the Securities and Exchange Board of India describes the basic functions of the Securities and Exchange Board of India as “protect the interests of investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith or incidental thereto”. In this light, the objectives of SEBI which we can gather are:

  1. To regulate the activities of the stock exchange.
  2. To protect the rights of investors and ensuring safety to their investment.
  3. To prevent fraudulent and malpractices by having a balance between self-regulation of business and its statutory regulations.
  4. To regulate and develop a code of conduct for intermediaries such as brokers, underwriters, etc.

Functions of SEBI:

The SEBI performs functions to meet its objectives. To meet three objectives SEBI has three important functions. These are:

  1. Protective functions
  2. Developmental functions
  • Regulatory functions.

Protective Functions: These functions are performed by SEBI to protect the interest of investor and provide safety of the investment. As protective functions SEBI performs functions like Checking Price Rigging, Prohibition of Insider trading, prohibiting fraudulent and Unfair Trade Practices, undertaking steps to educate investors so that they are able to evaluate the securities of various companies and select the most profitable securities, promoting fair practices and code of conduct in the security market.

Developmental Functions: These functions are performed by the SEBI to promote and develop activities in the stock exchange and increase the business in stock exchange. Under developmental categories, functions performed by SEBI are promoting training of intermediaries of the securities market, promoting activities of stock exchange by adopting a flexible and adaptable approach like permitting internet trading through registered stock brokers or by making underwriting optional to reduce the cost of issue.

Regulatory Functions: These functions are performed by SEBI to regulate the business in stock exchange. To regulate the activities of stock exchange some of the following functions are performed:

  1. SEBI has framed rules and regulations and a code of conduct to regulate the intermediaries such as merchant bankers, brokers, underwriters, etc.
  2. These intermediaries have been brought under the regulatory purview and private placement has been made more restrictive.
  • SEBI registers and regulates the working of stock brokers, sub-brokers, share transfer agents, trustees, merchant bankers and all those who are associated with stock exchange in any manner.
  1. SEBI registers and regulates the working of mutual funds etc.
  2. SEBI regulates takeover of the companies.
  3. SEBI conducts inquiries and audit of stock exchanges.

Major Achievements:

SEBI has enjoyed success as a regulator by pushing systematic reforms aggressively and successively. SEBI is credited with the quick movement towards making the markets electronic and paperless. The settlement is done in now in a quick and hassle-free way. SEBI has been active in setting up as many regulations as required under law. SEBI did away with physical certificates that were prone to postal delays, theft and forgery, apart from making the settlement process slow and cumbersome by passing Depositories Act, 1996[4].

Since its inception, SEBI has grown steadfastly. Its gradual growth can be analyzed through 3 scams- Harshad Mehta Securities Fraud, Satyam Scandal and Sahara Scam.

In the Harshad Mehta scam, SEBI had no authority to regulate the transactions between investors and brokers and was thus handicapped. The only authority with the jurisdiction to look into the matter was the Central Bureau of Investigation (CBI). The government was made aware of this major gap in the regulation of securities markets and after introspection, they decided to bestow SEBI with greater powers promoting it to the status of “market regulators”. In lieu of this, the Legislature speedily approved the SEBI Act, 1992. The 1992 scam elevated SEBI from a regulatory authority to the level of a statutory authority.[5]

The Satyam Scandal came to light on 7th January 2009. The whole scam did cost the markets approximately Rs. 14,000 crores. Ramalinga Raju the fraudster manipulated the books of accounts to cheat investors and shareholder. Raju disregarded SEBI Regulations of Fraudulent and Unfair Trade Practices (FUTP), SEBI Regulations for Prevention of Insider Trading (PIT) and SEBI Regulations for Issue of Capital and Full Disclosure Requirements (ICDR). The Satyam Scam was a major setback to SEBI. However, SEBI managed to hit back strongly. It investigated the matter and readjusted the books of accounts to reflect the real financial position of the company. After a complete study into the scam, SEBI released an order which was the first of its kind. SEBI held Ramalinga Raju and the 9 major associates guilty of insider trading, indulging in fraudulent and unfair trade practices. This order, along with the changes introduced by SEBI, was a message to the securities markets and the investor communities that SEBI was becoming stronger. Even though SEBI was not successful in detecting the scam on its own, it managed to lash back strongly to ensure such a scam never occurred again.[6]

The Sahara Scam is the yet another victory for SEBI in recent times. Sahara India floated 2 new companies- Sahara India Real Estate Corporation Limited (SIRECL) and Sahara Housing Investment Corporation (SHIC) in 2005 by registering them under the Companies Act, 1956 with the relevant Registrar of Companies in Kanpur and Maharashtra respectively. In 2009, when a red herring prospectus for Sahara Prime City (a real estate venture of Sahara India) was submitted to SEBI for approval, SEBI noticed unusual fund-raising activity in the 2 firms SHICL and SIRECL. SEBI launched an investigation against Sahara India, inquiring into the fund-raising activities of SHICL and SIRECL along with investor information. On following through with the investigation and finding Sahara guilty, SEBI passed an interim order, ordering the payment of Rs.24, 000 crores + 17% interest to 30 million investors. This was the first time in the history of SEBI that it had caught such a huge scam on its own.[7]

Conclusion:

SEBI has an indispensable role to play in the development of India’s economy because it is the only authority with complete control over the capital markets in India. SEBI is working continuously and in close coordination with the regulated and the government, to improve the market design to bring in further efficiency and transparency to market and make available newer and newer products while protecting investors in securities. The aim is to make Indian securities market a model for other jurisdictions to follow and make SEBI the most dynamic and respected regulator globally.

References-

[1] SEBI was established in 1988 but was only given regulatory powers on April 12, 1992, through the Securities and Exchange Board of India Act, 1992.

[2] G Sabarinathan, “SEBI’s Regulation of the Indian Securities Market: A Critical Review of the Major Developments” 35 VIKALPA 14 (2010).

[3] Shaji Vikraman, From early battles to position of strength: Evolution of Sebi, available at: http://indianexpress.com/article/explained/from-early-battles-to-position-of-strength-evolution-of-sebi-2/ (Last Visited on November 29, 2017).

[4] Anirudh Laskar & Vyas Mohan, Sebi’s 25-year journey, available at: http://www.livemint.com/Industry/xer1j7wBRbQH1UTOBVrRaL/Sebis-25year-journey.html (Last Visited on November 29, 2017).

[5] Fall Out of the Harshad Mehta Scam, available at: http://www.slideshare.net/prithvighag/indian-stock-marketscams (Last Visited on November 29, 2017).

[6] Payaswini Upadhyay, SEBI’s Satyam Order: 5 Years Too Late? Available at: http://thefirm.moneycontrol.com/story_page.php?autono=1131983 (Last Visited on November 29, 2017).

[7] Sahara V/s Sebi Case analysis, available at: https://www.slideshare.net/Svasani/sahara-vs-sebi-case-analysis-9law-poi (Last Visited on November 29, 2017).

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